How many Israeli companies or companies with some Israeli affiliation trade on Wall Street? Depends on how you make the count. In recent years, small Israeli companies, start-ups and the products of technological incubators, have managed to infiltrate the stock exchange over the sea, where they are shunted onto low-activity lists, such as the OTC Bulletin Board (OTCBB) or the Pink Sheets. The market values of other, more veteran companies too have tumbled, their shares sinking like so many heavy stones, and they too, have found themselves on such lists. Neither OTCBB nor the Pink Sheets appears on the radar screens of even a single investment house, and institutional investors steer clear of them. These shares account for minuscule volumes, and scarcely any interest is generated in them.
The reverse merger is not a new trick, or even, for that matter, an Israeli invention. So why are we dwelling on these companies? Because a fair proportion of those private companies that generate small revenues and losses, and some of which are still at the research stage, wanted to go public in order to raise money, and this they contrived to do, in quite substantial amounts at that. Despite the fact that they do not generate any extensive volume of activity, these companies have recently succeeded in persuading institutional investors, at least in the US, to open their wallets.
Does anyone remember the Israeli start-up Zone-4Play, founded in 2000? The company engages in the development of games platforms for wireless telephones and interactive television. Well, today, Zone-4Play is a public company with all the usual attributes - periodic reports and the transparency required by US law. At the beginning of the year, Zone-4Play found a stock exchange shell by the name of Old Goat, into which it decanted its activity; it now trades under the ticker ZFPLOB.
In the second quarter, the company had revenues of $190,000, accompanied by a net loss of $330,000. It burned up $260,000 in activity during the quarter; and with $235,000 cash in hand, and current liabilities in a similar amount, Zone-4Play managed to carry through two funding rounds in recent months. In April it raised $1.2 million including options from unnamed institutional and private investors from North America. Last month, the company announced that it had raised another $1 million. The company’s market value stands at some $ 20 million.
US market exposure
“The move was designed to create exposure vis-à-vis the US market”, says Zone-4Play VP finance Uri Levy. “This opens the way for us to raise currency and also allows for an exit option for employees. At the moment, we have no plans for further capital-raising”. Levy adds that, as a public company, it would be easier to land major contracts, for example in case of entering into a contractual engagement with Cablevision (NYSE:CVC).
Another Israeli company whose shares you will, from now on, be able to acquire on Wall Street, is GammaCan. The company is possibly better known as ARP Biomed,. In the past it attracted investment from Clal Industries and Investments (TASE:CII), but discontinued operations in 2002. It recently resumed activity, renaming itself GammaCan, having merged with the stock exchange shell of San Jose International, and now trades under the symbol GCAN.BO. Prior to the reverse merger, investors Zeev Bronfeld and Vered Caplan acquired the assets of ARP Biomed at a token price, and breathed new life into it.
The biotechnology company is focused on the commercialization of an anti-cancer immunization which it says has been found effective in staving off the spread of cancerous cells. GammaCan treatment is based on an injection, and is currently at various trial stages. In its previous existence as a private company ARP Biomed raised some $3.5 million. Since going to Wall Street, the company last month raised $920,000 with an option to recruit an additional $1.9 million by 2005.
GammaCan recently co-opted a new general manager, Dr. Dan Gelvan, also known as general manager of Zetiq. “The principal logic behind the move is to find a mechanism that will enable us to approach investors we were unable to reach as a private company”, Galvan says. “We are now able to approach institutional investors and hedge funds that have money and are prepared to investment in public companies, even ones that are characterized by low tradability. I have a doctorate in economics and finance, and I believe that , in contrast to a private company where there are capital-raising rounds, in which the initial investors suffer while waiting for the desired exit, in a company such as ours the possibility exists of selling shares immediately after making the investment”.
Galvan adds that the company intends to conduct another round of financing, noting that the round it recently completed as a public company was “infinitely easier” than previous rounds by private companies. “In biotechnology, great significance attaches to being a public company because everything goes slowly” says Galvan. ”Investors don’t need to wait ten years before my mice produce results; they have immediate liquidity and aren't locked in”.
A further example of a recent merger accompanied by a capital-raising exercise comes from the direction of the Jerusalem start-up Vsus (VSUS.OB), better known as Safe-Mail. About two months ago, the company accomplished a reverse merger with the public company Formula Footware. Vsus is developing an encoded communications system that secures private communications on the Internet and prevents unlicensed access. The company was founded in 2000 and it too (was there any doubt?) has start-up sized revenues. The company recorded revenue of $100,000 in the second quarter of 2004, accompanied by a net loss of $515,000 - an amount identical to the cash burned in that quarter’s activity.
Merger expenses came to $100,000 - hardly a negligible amount for the company. Since the beginning of the year, it has raised $1.7 million in the shape of loans from investors, and if the options distributed are exercised, an additional $3.5 million will flow into its coffers. Beyond that, the company is currently in process of conducting an additional fundraising round in a volume of a few million dollars. Vsus has obvious reasons for going into the stock exchange: despite an unpleasant legacy in the shape of a going concern warning (a memento from Formula Footware), its new currency - the share - is expected to prove cash equivalency. Meantime, the company is waiting for the permission of the US authorities to commence trading. A practical demonstration of the additional edge these companies can derive from being, perversely, public companies, can be illustrated by Tissera (TSSR), whose managers have sold off shares. The company was founded in 2000 on the basis of the work and research of Prof. Yair Reisner, of the Weizmann Institute of Science, and it develops methods of the implanting of tissues and organs, based on technologies calling for the use of embryonic stem cells. Tissera, innocent of any revenues, came to the over-the-counter stock exchange following a reverse merger with a stock exchange shell by the name of Bert Logic. The company’s shareholders received options, which they hastened to exercise. Indeed, general manager Dr. Vicki Rabenou in recent months exercised options earning her a theoretical profit of close on two million dollars. Tissera also completed a $5.5 million fundraising round in recent months so that the general manager came in for an additional bonus more generally found among public companies: a bonus of $ 110,000 on a contribution to completion of the funding round, an amount not paid to the general manager of any Weizmann Institute start-up.